Why There’s An Enthusiasm Gap: An Illustration

The Fed’s decision Tuesday to keep short-term interest rates near zero is no surprise. What’s odd is its apparent decision not to boost the economy by buying hundreds of billions of bonds — despite its acknowledgment that ”the pace of recovery in output and employment has slowed in recent months,” and that prices are rising too slowly for comfort (i.e., we might be facing deflation).

Every indicator suggests third-quarter growth will be as slow if not slower than in the second quarter. Consumer confidence is down. Retail sales are down. Housing sales are down. Commercial real estate is in trouble.

A growth rate of 1.6 percent means even higher unemployment ahead. Maybe we’re not in a double-dip but we might as well be in one. Growth this slow is the equivalent of heading downward, relative to the growth needed to get us out of the hole we’re in.

The Fed is deadlocked because it harbors hawks who worry near-zero interest rates will lead to another round of speculation, ending in an even bigger bust. Kansas City Fed President Thomas Hoenig, for example, is openly dissenting from the Fed’s near-zero policy and I’m sure he resists doing anything more to stimulate borrowing.

I don’t generally side with the hawks but they have a point.

Even though economy is heading downward, flooding it with more money may not help.

The problem isn’t the cost of capital. Most businesses can get all the money they need. Big ones are still sitting on $1.8 trillion in cash.

The problem is consumers, who are 70 percent of the economy. They can’t and won’t buy enough to turn the economy around. Most don’t qualify for more credit given how much they already owe (or have already defaulted on).

Without consumers, businesses have no reason to borrow more. Except to speculate by buying back their own stock and doing mergers and acquisitions, which is exactly what they’re doing.

Ultimately, even if fiscal and monetary policy weren’t deadlocked, we’d still face the same conundrum. Say the White House and Ben Bernanke got everything they wanted to boost the economy. At some point these boosts would have to end. The economy would have to be able to run on its own.

But it can’t run on its own because consumers have reached the end of their ropes.

After three decades of flat wages during which almost all the gains of growth have gone to the very top, the middle class no longer has the buying power to keep the economy going. It can’t send more spouses into paid work, can’t work more hours, can’t borrow any more. All the coping mechanisms are exhausted.

Anyone who thinks China will get us out of this fix and make up for the shortfall in demand is blind to reality.

So what’s the answer? Reorganizing the economy to make sure the vast middle class has a larger share of its benefits. Remaking the basic bargain linking pay to per-capita productivity.

Let me end with a brief commercial. My new book, “Aftershock: The Next Economy and America’s Future” is out today. In it, I explain this in detail.Robert Reich

DISCLAIMER: The opinions expressed here are those of the individual contributor(s) and do not necessarily reflect the views of the LA Progressive, its publisher, editor or any of its other contributors.

About Robert Reich

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine.

Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.

Comments

Poeple, he says, are not enthusiasically buying. True. We are buying what we need and can pay for. We are not running up more on our credit cards. In fact, we seem to be slowly but steadily reducing the national total on credit cards.

“Reorganizing the economy to make sure the vast middle class has a larger share of its benefits.” Spoken like a true class warfare socialist.

What percent of all incomes taxes are paid by the ‘rich’ (the top 5% of all income earners) already? Do you know? Do you know who actually makes up the ‘rich’ in this country? Does it bother you that some of the rich have worked 10-14 hour days the past 10 years to make the money and have endured a lot of personal hardships to get educated, build a business while taking huge risks, or just grind it out while you have not?

Just what do you think if fair? Do you think government has a right to everyone’s money and that everyone actually works for them (the politicians with their hands out or in your pockets and the wonderful faceless bureaucrats having meetings right now to figure out how to make our lives more miserable)? Prof Reich evidently does.

If you want it to be ‘fair’ then a flat tax of say 15% on everyone would be fair. No deductions. $7,500 for the guy making $50,000 a year and $75,000 for the guy making $500,000 a year. $7,500 vs $75,000 sounds fair to me. The way it is now $0 for the guy making $50,000 and $180,000 for the guy making $500,000. $0 vs $180,000. Is that fair? Or do are your rules of fairness skewed by your hatred for people who are successful at what they do while you are not.

Los Angeles

Michael Krikorian: There may be more doomed locales in town – the coroner’s identification room, a hospice where the only hope is that the end will soon come – but, for a mass gathering of gloom, nothing beats the CJ crowd on a Sunday.